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Mar 20

Exiting Lululemon ($LULU)

As we highlighted on StockTwits and Twitter throughout the day yesterday, $LULU broke below our invalidation point of $65.87 after unexpectedly lowering their guidance. Despite a late rally attempt it closed below that level, so we will exit at this morning’s open. The stock looks a little better bid so we should be out for a loss of around 8%.

Lululemon ($LULU) -8.5%. Original 3/14 entry post here.

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As much as we need to cut losing trades once they’ve invalidated, we also have to make it part of a process, exiting positions as calmly as you entered them, so you won’t find us trading in the after hours when this went below $60 Monday night, or even intraday yesterday believing we can predict what now constitutes a good price to exit. The trade is only invalidated once it closes below our stop, and then we get the next day’s open as our print.

 

 

4 comments

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  1. Chris

    Jon, since you are not using a hard initial stop, how do you calculate position sizing?

    1. Jon Boorman

      Not sure how you define ‘hard initial stop’ but we stated in the entry post that our rationale would be invalidated with a clean break of that $65.87 level, so in this example we would use that to calculate position size. We use closing stops to avoid after hours and intraday noise, but no matter what stop you use, when a stock gaps you get what you get. The important thing when using a stop to position size is to remember to think of it as the minimum you will lose, not maximum.

  2. Chris

    Thanks for the clarification. By “hard initial stop” I mean putting in a stop loss in the trading platform the moment a trade is entered. I was trained to always put in a stop loss so that a losing trade is automatically closed, no questions asked. But as you said if a stock gaps that’s nothing we can do.

    1. Jon Boorman

      Right, and I would never enter a stop in a platform for everyone to see once a trade is entered. I understand why daytraders do it absolutely, and you should always know where your stop is, but as I trade longer timeframes all my stops are on a closing basis, so there’s never any need for me to have anything in intraday or have to worry about being taken out on noise. Once our stop is breached on a closing basis we then exit at the next day’s open. The only stops I would ever have in the market during the day are trailing stops in futures markets once the trade has passed a certain time/profit threshold, like the one that got taken today in our Short Euro trade, as futures markets are virtually 24hrs so the close is just an arbitrary point in time.

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